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Sunday, September 19, 2010

Assorted Monetary Musings

Chevelle explains how to do quantitative easing (QE) so that it actually stabilizes aggregate demand. The previous round of QE--called "credit easing" by Bernanke--was not effective in shoring up nominal spending because it was geared towards stabilizing the financial system. I would complement Chevelle's proposal with an explicit nominal target (e.g. NGDP target, price level target, inflation target, etc.). That is, have the Fed announced it will do QE until some nominal target is reached and maintained.

Speaking of nominal targets, Niklas Blanchard calls for an explicit one along the lines of what they have in New Zealand. He says we should abandon the myth of central bank independence and have Congresss enforce a nominal target on the Fed. He would prefer a NGDP target--me too--but could settle for anything at this point.

Tyler Cowen provides further discussion on his New York Times piece on the Fed. Among other things, he (1) reminds conservative inflation hawks that Regan's robust recovery involved inflation above 3%, (2) notes that higher inflation would help the housing market, and (3) says he is open to NGDP targeting.

Scott Sumner says it is time for monetary soul-searching on the left. He notes that the more liberal mainstream media is currently abuzz about the "massively consequential decisions" now facing the Fed and wonders where such questions were back in late 2008 and early 2009. Back then, the mainstream media was focused on fiscal policy and largely ignored the power of monetary policy, the very issue they are now pushing so hard.

Josh Hendrickson looks at the Eurozone during the credit and housing boom and during the subsequent bust. He believes the evidence points to monetary policy being too loose during the boom and too tight during the bust. I think this may have something to do with the Fed's monetary superpower status.